Updated: Jun 26
You know you should have a household budget, and you have the best of intentions, but the task seems overwhelming. Having a budget is essential to establishing good credit and building savings. If you want to buy a house someday, a budget can be a great first step on a path to homeownership. Like any other overwhelming task, it’s best to break the task down into small steps.
Gather Your Financial Records
Assemble records of your income and expenditures. Use your taxes, W-2s, or pay stubs for income. To determine your expenses, you’ll need a few months of bank statements and credit card bills. If you regularly pay cash for things and keep receipts, gather those together. If you have access to Excel, there are budget templates you can use. There are also other online sources for templates.
List Fixed Expenditures
List expenses that are the same every month. This would include car payments, rent, or mortgage, insurance, and loan payments. It could also have some utility bills on it if they are always the same. You might, for example, pay the same for cable and internet every month, or your annual electric or water bill could be averaged, so you pay a set monthly amount. If you spend a different amount every month for utilities, add up a year's worth and divide by 12. Utilities are usually predictable enough to keep in the fixed category.
Bills that change from week to week or month to month are harder to predict. The toughest part of any budget is estimating daily and weekly expenses because we tend not to track them closely. Some of the many categories include food, medical, clothing, household, personal products, haircuts, gasoline, tolls, auto maintenance, entertainment, and vacations. Come up with a list of categories that makes sense for you and your family.
Bank & Credit Card Statements
Use your bank statements and credit card bills to start to total expenditures under the different categories. If this part of budgeting stops you in your tracks, break it down to finding all the entertainment expenses one day and all the grocery expenses the next. Highlight as you go, and little by little, you will have accounted for everything on the statements. Some credit card companies and banks offer services that categorize your expenditures for you. Some people use almost no cash these days, so you may get all the information you need from the bank and credit card records. If you use currency, you may have to keep receipts for a couple of months to fill in the missing information.
Compare Income and Expenditures
If you subtract monthly expenses from monthly income and you net a positive, you should be putting money into savings. If you aren’t, you are missing items in your expenditure list and may need to look for where the extra money is going. In other words, perhaps you have forgotten the coffee you buy every day with cash or the allowances you hand out on Saturdays. Finding what you missed will show you why you need this budget.
Evaluate and Adjust
Once you see what you have been spending, decide if you think you can spend less and set boundaries. Every month, total up what you have paid and compare it to what you budgeted. By becoming more aware of how much you are spending on what, you may automatically spend a bit less. You may realize that by drinking coffee at home or sometimes bringing your lunch, you can find ways to improve your credit and add to your savings.